This item was originally printed in Healthy Markets Association’s Market Structure Insights, January 2019 edition.
This year, we at Healthy Markets expect several new securities exchanges to be approved by the SEC.
The leading stock exchange contenders are the LTSE and MEMX. Both pose very interesting questions for the markets and market participants.
On November 30, 2018, the Peter Thiel and Marc Andreessen-backed Long Term Stock Exchange filed its Form 1. In doing so, the LTSE officially kicked off its bid to become yet another stock exchange.It’s been an interesting road to get here.
Initially started by Eric Reid (who reportedly still owns 30% of the LTSE parent company), the LTSE has been marketed as a response to the rising short-termism of the modern public markets. In December 2017, the company inked a deal with IEX to offer its listing standards as part of IEX, but the two parted ways last summer. One of the key elements of the LTSE offering was that companies listed on it would reward long-term holders with increased voting rights over time. And while that may sound nice in theory, a little tire kicking by SEC Democratic Commissioner Jackson (a former corporate governance law professor) revealed that the impact would be to consolidate control of the companies into the founders and a small handful of investors hands.
Once the LTSE ran into opposition at the SEC for this type of disenfranchisement of investors, the LTSE decided to strip out all of its long term listing standards and simply apply to become an exchange. According to LTSE executives, the company remains committed to ultimately adopting unique long term-focused listing standards, but it will seek to implement those slowly, and carefully, after the exchange application is approved. An exchange registration has significant monetary value, as CHX’s sale just proved. That deal was reportedly for $50-$100 million. If the founders of LTSE walk away right now, they have nothing. But if they get registration, they at least have a valuable asset–with or without any listings.
Of course, assuming LTSEs owners decide to stick with it after their registration is approved, they will then have to get down to the difficult task of implementing their long term policy focus. Thats going to be difficult. Silicon Valley executives dont want to relinquish control (hence the rise of dual class share structures).
They definitely dont want to listen to (or get fired by) their companys new shareholders. So how do you create a listing standard that long term investors want and corporate executives (who actually pick where to list) both like? We arent sure how to thread that needle. And its clear from the exchanges last attempt at listing standards that they arent certain on a path forward either.
We wish them luck, but we arent optimistic. On the other hand,we are optimistic that the exchange will prove to be a profitable investment for Reis, Thiel, and Andreessen. We suspect another exchange family will eventually buy them out for a tidy profit. LTSE isnt the only company seeking to become yet another securities exchange. On January 8, a number of retail brokers and wholesalers announced the creation of the Members Exchange (MEMX). Virtus Doug Cifu, TD Ameritrades Steve Quirk, Citadels Jamil Nazarali, and UBS’s Vlad Khandros were quoted in the press release. The purpose: “offer a simple trading model with basic order types,the latest technology, and a simple, low-cost fee structure.
Weve been asked a lot about this one in the past two weeks. We have no idea whats going to happen. It could be that the firms are going to push to get the exchange application filed and approved. At that point, they could get a seat at the SIP Operating Committee and even a chunk of the money from the public market data stream (the CTA/CQ Plan and UTP Plan).A seat at the table where the revenues for public market data are hashed out could be big– and is something the dominant three families (Cboe, NYSE, and Nasdaq) would likely want to avoid. This could really be used to hammer the exchanges on their public market data revenues, which totaled more than $100 million for each of the big three families in 2017. And if MEMX gets a slice of the public data revenues, its owners could recapture some of their own exchange data and connectivity costs–which are non-trivial.
But they could also go even further. They could plow those revenues back in to offering even more order routing incentives– essentially sharing the tape revenues with those who execute on the exchange. Weve been inching in this direction for years (with the TRF), so this seems like a realistic possibility. So, while this could be good for those routing the orders, it could exacerbate some of the very same conflicts of interest in order routing that have given rise to years of angst and the birth of the transaction fee pilot. As of now, this looks pretty serious. We’ll know for sure if Joe Mecane (currently with Citadel and formerly the COO of NYSE) ends up taking the helm.
On the other hand, this could all be a bluff to simply negotiate cheaper data, connectivity, and trading rates.
Well keep you posted. In the meantime, we cant wait to read the Form 1.
Separately from the stock exchange chaos, we also have the proliferation of options exchanges. MIAX just received approval for its EMERALD exchange, which is set to open in February. Given their expansion, we wouldnt be surprised to see MIAX move into the stock exchange business soon.
